Some thoughts on the Q4 earnings release and call. I had thought the maximum EPS would be 90 cents because I couldn't see LANC's margins going much over that. It turns out the pre-tax margin in the specialty food business was 20%, which was higher than at any time since 2000.

It looks like all of the improvement in the margin (as compared to Q3) was lower raw material costs. They estimated that lower input costs saved about $ 13 million in the quarter, and however you split that between specialty foods and candles, the savings makes up almost all of the improvement in margins. The company thinks the lower prices will continue for the first half of fiscal 2010.

In the first half of fiscal 2009, rising input prices cost LANC $ 31 million, pre-tax. If this reverses to a gain of $ 20 million in the first half of fiscal 2010, we might expect an improvement in EPS of about $ 1.10. This would take the EPS in the first half of 2010 to around $ 2.50. I don't have a lot of history with LANC, but this seems unbelievable. I think they would have to give back some of the savings to their customers, but the EPS should still be great for the quarter or 2. But on a longer term basis, there's no way the company can maintain 20% margins. On the call, they said they targeted mid- to high-teen margins. Every 1% drop in pre-tax margins costs about .25 in annual EPS (my back of the envelope calculation.)

And I'd like to point out that Barron's negative article about LANC ( essentially saying that it sells caviar and candles, two things that consumers can do without in a recession) was nonsense, at least for another quarter.

So, I think earnings will continue to surprise on the upside for another Q or 2, and then fall back. Maybe I'll hold for a while longer.